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By Lisa Nagele-Piazza
Jan. 28 — A team of financial advisers who formerly worked for Credit Suisse Securities (USA) LLC must arbitrate an employment-related dispute before a private arbitration provider rather than a Financial Industry Regulatory Authority forum, the U.S. Court of Appeals for the Second Circuit ruled Jan. 28.
The financial advisers argued that a FINRA rule requires arbitration in a FINRA forum, even though they signed employment agreements that required arbitration by an independent service provider, such as JAMS or the American Arbitration Association.
But FINRA arbitration may be waived in a pre-dispute agreement that designates another forum, the appeals court said in affirming the district court's ruling.
The arbitration provisions of a self-regulatory organization (SRO) such as FINRA are “default rules which may be overridden by more specific contractual terms,” the court held.
This case highlights the difference between an impermissible agreement to completely waive arbitration and a permissible pre-dispute designation of an alternative forum. Second Circuit precedent has established that an SRO's broad arbitration rules generally may be replaced by specific contract provisions.
The five Los Angeles-based advisers signed employment agreements in 2008 that included a dispute resolution provision, according to the court.
The provision included as a final step in the grievance process “binding arbitration before one of three independent service providers.”
Before the advisers resigned from Credit Suisse, they had a dispute with the company about how much money they owed it under an optional program for employees to “hedge” certain compensation. If employees experienced a loss, they were required to pay the company any deficit.
After the employees resigned, Credit Suisse started arbitration proceedings with JAMS, and the advisers filed counterclaims. The company also initiated a mediation with JAMS asserting that the advisers impermissibly solicited its clients and employees when they moved to competitor Merrill Lynch.
The mediation was unsuccessful, and the advisers and Merrill Lynch commenced a FINRA arbitration against Credit Suisse. They asserted that Credit Suisse breached an industry agreement related to employee mobility and claimed that the company was liable for defamation, tortious interference and unfair competition.
Credit Suisse sought to enforce the employment agreements and compel arbitration by JAMS instead of FINRA.
FINRA is an independent organization authorized by Congress to regulate securities markets and individuals who sell securities in the U.S., the court said.
FINRA arbitration is governed by code of arbitration procedure and is used to resolve disputes between member firms and “associated persons.”
The advisers argued that Rule 13200 requires the parties to arbitrate their dispute in a FINRA forum and that the rule can't be waived.
But the appeals court disagreed.
“We have held in several cases that an SRO's arbitration provisions are default rules which may be overridden by more specific contractual terms,” Judge Christopher F. Droney wrote for the court.
The employees pointed to a case in which the Second Circuit held that a pre-dispute arbitration waiver wasn't enforceable (Thomas James Assocs. v. Jameson, 102 F.3d 60 (2d Cir. 1996)). But that case involved a total wavier of arbitration, whereas the current case simply provides for a different forum, the appeals court said.
“Forum preference does not raise the same public policy concern as a complete waiver of arbitration,” the court found.
Judges Robert D. Sack and Jon O. Newman joined the opinion.
Dewey Pegno & Kramarsky LLP represented Credit Suisse. Gallagher Harnett & Lagalante LLP and Moulton, Wilson & Arney LLP represented the advisers.
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